Saturday, May 7, 2011

Is the 5/95 housing loan scheme a better option?

When Lehman Brothers fell in September 2008, the Malaysian property market entered a challenging period. There were few takers and developers were at a loss as house buyers were few. In the first quarter of 2009, one of Malaysia’s largest property developer, SP Setia group coined what was soon to become popularly known as the 5/95 scheme.

Soon after, other established property developers such as Glomac Bhd, Mah Sing Group Bhd, Malton Bhd and Sunrise Bhd followed suit with their 5/95 home loan schemeswith different degrees of success. Some of these schemes could be 10/90, where a buyer paid a 10% downpayment.

Essentially, the 5/95 scheme was meant to help boost property sales which was then being threatened by a slowing economy. Under the scheme, house buyers need to pay 5% of the downpayment while the rest will be financed through a loan. Servicing of the loan starts only when the property is up and ready.

Are these schemes beneficial to house buyers? Or is it another marketing tool of developers?

In the short term, it may seem attractive. After all, one only has to pay 5% or 10% of the price of the house and the next payment is only when one takes delivery of the house. The developer will also bear other entry costs such as legal fees, stamp duty on the sale and purchase agreement and loan agreement as well as memorandum of transfer for purchases under the campaign.

A mortgage loan officer who has done his rounds being on the panel of bankers for various developers says the conventional loans and not the interest-bearing ones, are better options in the long run.

He says that no developer will bear legal fees, interests or stamp duty for free. All these are in fact factored into the price of the house. He says that 5/95 schemes are popular particularly among entrants to the job market because they have problems forking out the downpayment, which is usually the biggest challenge when purchasing big ticket items such as a property.

Because they are young, time is on their side. Such schemes are also popular among speculators because their intention is to sell the house the minute they take delivery of it.

While it is understandable that developers need to sell, what may be prudent for buyers is to ask for an option, to either enter into a 5/95 or to go for the conventional mortgage. And if a conventional loan is possible, whether the developer will reduce the price of the house. However small that percentage may be, it will add up.

A developer of a high-rise condominium project in Petaling Jaya gave buyers an option of a 5/95 scheme or pay more for the downpayment. If a buyer were to opt for the conventional scheme, the price of the house is reduced.

Given the sharp rise in property prices last year, it may appear that most of these house buyers could be sitting on potential profits.

While house prices in the Klang Valley grew by an average of 10% a year in the last two years, selected areas saw astounding growth of 25% annually.

As most of those who bought houses under this scheme, particularly in the Klang Valley, likely comprise those from the middle to upper income bracket as well as speculators, chances of them facing difficulties servicing their loans may be low.

“These days, one can stretch the repayment period from 35 to 40 years, especially if one is in his or her late 20s or early 30s. Thus, the 5/95 scheme, together with the long repayment period, is very helpful for first time buyers,” says a banking analyst. “People like 5/95 because the initial capital outlay is low, hence it doesn’t hurt so much. One reason why property prices remain high could possibly be because the hidden cost of 5/95 is already imputed in the price. High as it may be, people continue to buy anyway,” said KGV-Lambert Smith Hampton Sdn Bhd director Anthony Chua.

Another property consultant added that 5/95 was popular because of the affordability factor.

“Many people can’t afford the down payment for the 10/90 scheme and are digging into their Employees Provident Fund. So even if 5/95 may be perceived to be more expensive, it will still remain popular, ” said the property consultant.

Chua added that with 5/95, the buyer might be paying more but he wont feel the pinch as the loan period was over a longer period.

“Furthermore, with the real property gains tax at 5%, coupled with our inflationarry environment, it also keeps the risk of buying homes under the 5/95 scheme even lower, as the house price is more likely to increase in tandem with inflation,” said the property consultant.

A banking and property analyst says the difference between 5/95 and 20/80 schemes is merely in the interest portion paid.

“When you pay interest on a 95% down payment versus interest on 80% down payment, of course the interest payment on the 80% is lower.”

She adds that there is a perception of savings under the 5/95 scheme and the buyers’ salary could increase after three years, hence reducing the stress on their balance sheet.

Zerin Properties founder and chief executive officer Previndran Singhe adds that when purchasing properties, it is all about the purchasers’ cashflow abilities. The buyer will decide based on his monthly income and his ability to service his monthly commitments.

“At the end of the day, it is only an interest issue. Everyone claims that the interest fees and other costs are built into the 5/95 scheme,” he says adding that if a property product is good and developed by a reputable property developer and in a good location, he would encourage the buyer to purchase the property via the 5/95 scheme, especially if the interest rate was low.

“What is more important is to look at the interest rate at the time, not whether it’s 5/95 or 20/80,” he says.

With interest rates going up today, the bigger question is this: Will those who buy properties under the 5/95 or 10/90 be committed to their mortgage payments, or will they take the opportunity to cash out?